Help Please. I will greatly appreciated. Clancy Inc. is considering a project wi
ID: 2725051 • Letter: H
Question
Help Please. I will greatly appreciated. Clancy Inc. is considering a project with the following cash flows: Clancy has a policy of rejecting all projects that don't pay back within three years and analyzing those that do more carefully with time value based methods. Does this project warrant further consideration? Should Clancy accept the project based on its NPV if the company's cost of capital is 8%? Is the recommendation definite or marginal? What conclusion will the firm reach based on PI and an 8% cost of capital? Is the conclusion definite or marginal?Explanation / Answer
Year
CashFlow
Cum Cash Flow
-
(7,800)
(7,800)
1
2,300
(5,500)
2
3,500
(2,000)
3
4,153
2,153
Payback Period = 2+ 2,000/4,153
= 2+0.48
=2.48years
As payback period is less than we can accept the project
Year
CashFlow
PV Factor@ 15%
PV
-
(7,800)
1.0000
(7,800.0)
1
2,300
0.9259
2,129.6
2
3,500
0.8573
3,000.7
3
4,153
0.7938
3,296.8
NPV
627.1
As NPV is positive we can accept the project
Profitability Index= NPV + Initial Investment/ Initial Investment
=627.1+7,800/7,800
=8,427.1/7,800
=1.08
As PI is greater than 1 we can accept the project
Year
CashFlow
Cum Cash Flow
-
(7,800)
(7,800)
1
2,300
(5,500)
2
3,500
(2,000)
3
4,153
2,153
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